Wednesday, November 19, 2008

The K-Mart of Television Signal Providers

A recent lengthy commentary in The Hollywood Reporter is perpetuating an impression created by financial analysts regarding Dish Network, the satellite TV signal provider.

It doesn't delve into the problems created by the EchoStar Communications Corporation split this year, or even indicate an awareness of the balance sheet differences between November 2007 EchoStar Communications Corporation and November 2008 Dish Network, differences which are like night and day.

It does identify a truth that should dominate the rest of the analysis of the company. It's "Charlie Ergen's company."

When Charlie was a 30-something, he started EchoStar. When Charlie was 40-something he got EchoStar DBS going.

Charlie will be 56 in March. The now "Old Charlie" still may be a tenacious techie dreamer. Probably he has a really good idea for that 700MHz spectrum Dish Network is on the hook for. But finding what amounts to startup money in 2009 to do anything with that spectrum isn't going to be improbable, it's going to be all but impossible. And I believe Charlie's heart is with the new Echostar, the one that owns Slingbox and makes the ViP receiver/recorder boxes. That Charlie isn't the logical 21st Century mentor of the new Dish Network.

The new Dish Network is a retail service operation. Like WalMart, it demands clever marketing while renegotiating contracts with its suppliers, the various media companies and local channel owners. But that's also where the WalMart analogy completely breaks down. Acquiring those television signals can't be outsourced to producers in third world countries so Dish's prices can be kept low and still maintain a meaningful profit margin. The analogy to WalMart is flawed.

DirecTV and the new Dish Network compete against established cable and telecom companies that offer at least three products: (1) television signals, (2) internet connections, and (3) telephone service.

All these television signal providers are now selling insert advertising. On the other hand, Dish Network's sibling EchoStar designs and sells boxes designed to skip advertising while Dish Network needs to get a cash flow stream going from those ads.

DirecTV has already hedged it's hardware bets by repartnering with TiVo which is run by a former NBC executive and is already working to help advertisers get through to commercial skipping viewers (see this article). DirecTV has a cousin's relationship with media producers and has already put it's toe in the media production market. And in 2007-2008 it committed huge sums to the only real product it has to sell - TV signals - and huge sums to market to new customers during the runup to a major change in it's product from analog SD TV to digital HD TV.

Yes, EchoStar Communications Corporation offered HD early, developing really cool hardware and offering pioneering HD signals from HDNet and VOOM, much like a 20-something techie fiddling in the garage, definitely not like a 50-something marketing veteran laying out a 5-year plan for dominating a market. Then, just as it started losing the HD retail market advantage, EchoStar Communications Corporation split itself in two in what appeared for all intents and purposes to be a maneuver by Charlie to sell it's retail service component, Dish Network, and keep the garage, Echostar. That didn't work because nobody bought Dish Network before the economic meltdown.

In fact today Dish Network superficially looks like the WalMart of television signal providers. But the analysts' analogy is wrong. Dish Network has no real control of the cost of it's product and most certainly has no control over the content in its product. The advantage has gone to its competitor who recognized the truth about its mature product - TV channels. What appeared to be a somewhat expensive contract for a "cable" channel signal was, in fact, all DirecTV had to market. To DirecTV it wasn't foolishly signing too expensive contracts for signals, it was investing in the future, it fit into a logical market plan. Charlie is still holding out for bargain basement prices.

In the meantime, 50-something-Charlie's Echostar decided to make cool DVR boxes for OTA television viewers. These viewers, so far in the 40 years of "cable" channel existence, have had no need for "cable" channels and, apparently, wouldn't spend the money on a TiVo. And irony of ironies, Charlie has Dish Network dealing with the retail problems of these boxes which likely will alienate many who will ultimately switch to a signal provider, most likely an uncomplicated one which would either be cable or telecom company.

The only good advice in that article is this: "So, revisit Dish shares next year. Your Wal-Mart shares have served you better in 2008; those are down only a few bucks in the past six months and up year-to-date."

Yes, let's see what the new Dish Network without the new EchoStar looks like next November. Maybe Old Charlie really does have his finger on the door-to-door retail television signal service market.

Heck, I'm already "invested" heavily just as a customer of this company I think is analogous to the 1999 K-Mart. I'm eagerly awaiting its February "Blue Light Specials" (annual package and pricing changes) and wondering if it will ultimately need its "Sears Holding."

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